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Bank Depositors, beware

Published: 13 Feb 2018

Money is a never-ending problem, said Alvin Ailey.

Those who lack money, crib about the lack of it. Those who have, debate when, where and how to spend, save or invest it, how to reap dividends and how to keep it safe.

For conservative Indian investors and most of retired Indians, bank deposits are the most popular instruments. They are considered to be the safest.

However, the proposed Financial Resolution and Deposit Insurance Bill (FRDI) has been making a lot of bad noise off late and has released shock waves among depositors.

As is the case with government of India, all difficult even harsh measures are imposed with sugar coating of words. There goes our Finance Minister who says that the underlying intention behind the FRDI Bill is to “provide a specialised resolution mechanism to deal with bankruptcy situations in banks, insurance firms and financial sector entities”.

What is missing from this statement is the fact that the specialised resolution is to come from depositors’ money!

On one hand, we have the entire banking system in shambles with unforeseen NPAs on account of fraudulent and irregular funding without any checks and balances (even corruption playing some part) to biggest industrial houses in India. The government has to come up with the Bankruptcy code to retrieve whatever can be recovered – it is expected that not even 10% of NPAs will ultimately be recovered, if at all.

After these haircuts, some of the banks for sure struggle to survive – how they will recover is to be in accordance with the FRDI Bill.

Any bank on the brink of failure will make its creditors and depositors take a loss on their holdings. The FRDI bill will allow dying banks to restructure their liability, which will include even depositors’ money lying with them.

So, the government will bail out the defaulting borrowers by punishing the depositors. The banks may seize your deposits and issue fixed-term bonds or other securities with a lock-in.

Therefore, if passed in its present form, your deposits with the banks will not be safe or liquid any more.

This experiment has already been unsuccessfully employed in several other countries.

The moot question here is – are the banks trustworthy enough? The same banks who have lost big money due to corruption or lack of due diligence are will be asking depositors to trust them with their money for a longer term and lose liquidity. What is the safeguard that the banks will not misuse this money again to lend to sub-standard borrowers?

You may see it any which ways, but it seems the government wants to reward the loan defaulters by attaching the depositors’ money to bring dying banks to life.

In any case, your deposits are not completely safe even now, insured only up to Rs. 100,000.

May be time to withdraw your money and keep it in a Tijori or keep it underground. This is not Digital India the government wants us to push to.

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 Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in "The A-List - India's Top 100 Lawyers" by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at bhumesh.verma@corpcommlegal.com.

Bhumesh Verma

Firm: Corp Comm Legal
Country: India

Practice Area: Contract

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